Is KRTX A Good Stock To Buy Now?

In this article you are going to find out whether hedge funds think Karuna Therapeutics, Inc. (NASDAQ:KRTX) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is KRTX a good stock to buy now? Prominent investors were taking a bearish view. The number of long hedge fund positions decreased by 1 in recent months. Karuna Therapeutics, Inc. (NASDAQ:KRTX) was in 15 hedge funds’ portfolios at the end of September. The all time high for this statistic is 16. Our calculations also showed that KRTX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). There were 16 hedge funds in our database with KRTX holdings at the end of June.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 66 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Kris Jenner - Rock Springs Capital

Kris Jenner of Rock Springs Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now let’s take a gander at the key hedge fund action encompassing Karuna Therapeutics, Inc. (NASDAQ:KRTX).

Do Hedge Funds Think KRTX Is A Good Stock To Buy Now?

At the end of September, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from one quarter earlier. On the other hand, there were a total of 9 hedge funds with a bullish position in KRTX a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Karuna Therapeutics, Inc. (NASDAQ:KRTX) was held by Farallon Capital, which reported holding $54.1 million worth of stock at the end of September. It was followed by Viking Global with a $51.3 million position. Other investors bullish on the company included Rock Springs Capital Management, Partner Fund Management, and Baker Bros. Advisors. In terms of the portfolio weights assigned to each position Prosight Capital allocated the biggest weight to Karuna Therapeutics, Inc. (NASDAQ:KRTX), around 0.58% of its 13F portfolio. Partner Fund Management is also relatively very bullish on the stock, dishing out 0.49 percent of its 13F equity portfolio to KRTX.

Because Karuna Therapeutics, Inc. (NASDAQ:KRTX) has witnessed bearish sentiment from hedge fund managers, it’s easy to see that there exists a select few fund managers who sold off their positions entirely by the end of the third quarter. Intriguingly, Benjamin A. Smith’s Laurion Capital Management said goodbye to the biggest investment of the 750 funds followed by Insider Monkey, comprising about $6 million in stock, and D. E. Shaw’s D E Shaw was right behind this move, as the fund sold off about $0.8 million worth. These transactions are interesting, as total hedge fund interest fell by 1 funds by the end of the third quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Karuna Therapeutics, Inc. (NASDAQ:KRTX) but similarly valued. These stocks are First Interstate Bancsystem Inc (NASDAQ:FIBK), Taubman Centers, Inc. (NYSE:TCO), Mr. Cooper Group Inc. (NASDAQ:COOP), EPR Properties (NYSE:EPR), SpringWorks Therapeutics, Inc. (NASDAQ:SWTX), SciPlay Corporation (NASDAQ:SCPL), and Outset Medical, Inc. (NASDAQ:OM). This group of stocks’ market values match KRTX’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FIBK 11 14085 -1
TCO 36 538236 -4
COOP 23 416248 -1
EPR 24 327724 1
SWTX 16 847645 1
SCPL 27 128931 1
OM 27 586730 27
Average 23.4 408514 3.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.4 hedge funds with bullish positions and the average amount invested in these stocks was $409 million. That figure was $168 million in KRTX’s case. Taubman Centers, Inc. (NYSE:TCO) is the most popular stock in this table. On the other hand First Interstate Bancsystem Inc (NASDAQ:FIBK) is the least popular one with only 11 bullish hedge fund positions. Karuna Therapeutics, Inc. (NASDAQ:KRTX) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for KRTX is 40.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and still beat the market by 15.8 percentage points. A small number of hedge funds were also right about betting on KRTX as the stock returned 22.2% since the end of the third quarter (through 12/14) and outperformed the market by an even larger margin.

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Disclosure: None. This article was originally published at Insider Monkey.